Most retirees are living, at least in part, off their investments. This can make ordinary market swings especially stressful.
Unfortunately, when investors get stressed about the market, they tend to make impulsive decisions that hurt the long-term performance of their portfolio. In short, they are likely to engage in panic selling, which can lead them to buy high and sell low.
The Questions
To see if you’re vulnerable to this costly mistake, we’ve created a short quiz.
Your answers can help predict how likely you are to buy high and sell low during the next period of market volatility.
1. How often do you evaluate the performance of your investments?
a) Daily or weekly [5 points]
b) Monthly or quarterly [4 points]
c) Annually [3 points]
d) Every few years [2 points]
e) Never [1 point]
1. I often set a goal but later choose to pursue a different one. Is this:
a) Very much like me [5 points]
b) Mostly like me [4 points]
c) Somewhat like me [3 points]
d) Not much like me [2 points]
e) Not like me at all [1 point]
3. Do you use any apps to regularly check on the performance of your investments?
a) Yes [5 points]
b) No [1 points]
Answers
Now let’s assess your risk of buying high and selling low. Add up your points. If you scored 10 points or higher, you are at high risk of making this costly mistake. A score between 6 and 9 places you at medium risk, and score 5 or below means you are at low risk.
How do these questions help predict your tendency to buy high and sell low?
If you frequently evaluate the performance of your investments, you are more likely to notice short-term market declines and thus engage in panic-selling. The problem is not necessarily the losses, but how often you experience the negative emotions associated with them.
If you are frequently switching goals, you might also be more likely to buy high and sell low. That’s because the willingness to give up on your longer-term goals also makes you more likely to give up on your long-term investment strategy, especially in the face of short-term declines.
In contrast, those who tend to stick with their goals are probably more likely to shrug off the market losses. They realize that investing is a long-term endeavor.
Finally, using apps to monitor and manage your investments can also increase your risk of selling at the wrong time.
Although apps and smartphones can make investing more convenient, that convenience becomes problematic during periods of high volatility. After all, selling at the wrong time is just a click away.
So what should retirees do when markets drop? If you’re at medium or high risk of buying high and selling low, it’s especially important to see the big picture and not stress too much about the latest market fluctuations. That’s because even big market swings are unlikely to significantly impact your monthly paycheck. For instance, if the stock market drops by 10%, your actual portfolio is likely to only decline by 5% or so, as a diversified portfolio for near-retirees and retirees is likely to be split between stocks and bonds. (And bonds often remain stable during periods of stock market decline.)
However, even that smaller percentage decline almost certainly overstates the impact of a market decline on the wealth of retirees. That’s because much of your wealth in retirement is actually derived from your future Social Security income, which isn’t impacted by market performance. Focusing on these more meaningful numbers—rather than the latest market movements—can make a bear market much less scary. It can also reduce the risk that you’ll overreact and panic sell, and thus hurt your long-term investment performance.
Actions
- Assess your risk of buying high and selling low.
- If you are at medium or high risk of buying high and selling low, take extra steps to ensure you see the big picture. This includes focusing on the Boomer Total Wealth Index, rather than the latest market movements.
- Do nothing (except for deleting your investment tracking apps).
Additional reading:
Benartzi, Shlomo, and Richard H. Thaler. "Myopic loss aversion and the equity premium puzzle." The Quarterly Journal of Economics 110.1 (1995): 73-92.
